What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Far East Group (Catalist:5TJ) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Far East Group, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.017 = S$1.1m ÷ (S$118m - S$49m) (Based on the trailing twelve months to June 2024).

Thus, Far East Group has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 6.1%.

View our latest analysis for Far East Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Far East Group's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Far East Group.

What Can We Tell From Far East Group's ROCE Trend?

We're delighted to see that Far East Group is reaping rewards from its investments and has now broken into profitability. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Far East Group is using 23% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Far East Group could be selling under-performing assets since the ROCE is improving.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 41% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From Far East Group's ROCE

In a nutshell, we're pleased to see that Far East Group has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 57% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.